A Fair Deal: Under a New Contract, the Coast Guard’s National Security
Cutter Project Moves Forward

The stories on Aug. 8, 2007, read: “Coast Guard and industry agree
to $592 million contract for the National Security Cutter (NSC) project.” The
news reflected that the NSC would proceed under a fresh agreement on cost,
and the resolution of contractual and technical issues. But what did it take
for the Coast Guard and industry to achieve their goal of strengthening relationships
and pressing on with this crucial shipbuilding project?

The NSC project, which is part of the $24 billion Deepwater modernization
and recapitalization program, is building the future flagships of the Coast
Guard’s fleet. The NSCs, which are under construction by Northrop
Grumman Ship Systems, at Pascagoula, Miss., will be the largest and most
technically advanced ships in Coast Guard history.

The new ships’ complexity is reflected in the contractual agreement
between the Coast Guard and Integrated Coast Guard Systems (ICGS), which
is an industry joint venture between Northrop Grumman and Lockheed Martin.
The Coast Guard and ICGS have struggled with the NSC’s original contract
vehicle and an integrated product team structure that did not adapt very
well to change, even as dramatic changes were occurring throughout the
Deepwater program.

The NSC project has faced major challenges, including increased requirements
based on the events of 9/11, damage to the yard caused by Hurricane Katrina
in 2005, and the Northrop Grumman Ship Systems labor strike in 2007. These
challenges have affected the NSC project’s cost and schedule.

NSC Project Manager Kai Skvarla explained that the Coast Guard and industry
have undertaken a number of efforts to address challenges and strengthen
the project. For example, NSC design changes are now carefully reviewed
by the technical authority, t verify compliance with established shipbuilding
standards. Additionally, both the acquisition and technical staffs leverage
the experience of the Naval Sea Systems Command (NAVSEA) in preparing recommendations.
Other steps have been taken to resolve most of the Coast Guard’s
contractual concerns. Early this past year, the Coast Guard realized that
addressing all the numerous changes in contract terms and conditions could
be combined under a single action.

“This [combination of efforts] raised the stakes,” Skvarla
said. “It allowed stakeholders to see the big picture and evaluate
the total impact of any single issue on the NSC project. This perspective
ultimately allowed the team to negotiate successful resolution of hundreds
of [technical and contractual] issues.”

Negotiation

The negotiation process came to be known as the Consolidated Contracting
Action, or CCA. At its heart, the CCA resulted in a new agreement on the
NSC project’s costs, as well as resolution of contract and design
issues associated with the first two ships, NSC 1 and 2. The negotiations
also resolved industry’s $300 million Request for Equitable Adjustment
(REA), which reflected the contractor’s assessment of additional
costs of post-9/11 mission requirements.

The new NSC contract that emerged from the CCA in August 2007 was the
culmination of a rigorous negotiation process that consumed approximately
nine months and more than 50,000 labor hours, according to project officials.
The negotiators included contracting officers Desiree Sylver-Foust and
Dan Hartinger, with support from legal counsel, Andrew E. Squire. Tom Essig,
deputy chief procurement officer with the Department of Homeland Security
(DHS), helped guide the negotiations. Additional support was provided by
the US Navy’s Naval Sea Systems Command (NAVSEA).

Sylver-Foust said in an interview that the CCA negotiations began in earnest
during January of 2007, with meetings between Coast Guard and ICGS personnel.

“We [government and industry] listed all the issues we could think
of with regard to the contracts for NSC 1, 2 and 3,” she said. “We
had a look at each item on the list and [determined] what effect it would
have on the contract, for the government and for ICGS.”

While the negotiation process was challenging for all parties involved,
the leadership of the Coast Guard’s Acquisition Directorate emphasized
that the goal was not win or lose, government vs. industry. Rather, the
new contract structure that has now been established represents the best
solution for moving the NSC project forward, and delivering the ships that
the fleet urgently needs.

“This isn’t a case of Coast Guard wins and Integrated Coast
Guard Systems loses; and it isn’t a case of people turning hand springs.
What this is, is a great resolution to a tough problem that we (government
and industry) encountered collectively,” said Claire Grady, director
of contracting and procurement with the Coast Guard’s Acquisition
Directorate. “The agreement gives us a path ahead. This is a fair,
equitable deal.”

The new contract clarifies the desired technical characteristics of the
NSCs; it defines the project’s contractual requirements; and it allows
the government better oversight of cost performance, Skvarla added.

“Additionally, and most importantly it provides incentives to the
contractor … to reduce cost,” he said.

For example, the new contract includes an incentive clause that links
fee earned directly to actual costs performance. The final cost of constructing
the ship determines how much fee the contractor earns, according to Grady.

“The incentive clause we have specifically links to cost performance,” Grady
said. “If the contractor performs above target cost, the overrun
is shared between the government and the contractor; there is a real disincentive
for the contractor to be there.”

The contract also includes a “notification of changes” clause.
The clause requires that ICGS –as soon as possible, but no later
than 30 days– notify the Coast Guard of any behavior that could lead
to a change in the contract, which might entitle the contractor to an equitable
adjustment. Every six months, the government receives from the contractor
a release from potential changes or REAs that may have emerged during that
period of time.

“This keeps things up front, and puts everything on the table, not
building up in a huge file that is going to come back at us later,” Grady
said. “We will deal with the issues real-time, periodically as we
move ahead so that we don’t end up in a situation where we have a
large number of changes or allegations of changes. Identifying and dealing
with issues up front is a practice that the Navy has used for 40-plus years
and is something that the shipbuilders are used to.”

Deepwater Counsel Andrew Squire noted that the new agreement protects
the rights of industry and the Coast Guard, while improving the relationship
between the Coast Guard and ICGS by helping to establish better procedures
for contract execution.

Additionally, the new agreement eliminates from the contract for NSC 1 & 2
(and does not include in the contract for NSC 3) the so-called “H.60” clause.
H.60 became an important negotiating point for the Coast Guard because
it established that the pricing of individual delivery orders under the
contract would be based on executing the Deepwater program to ICGS’s
implementation plan.

The H.60 clause stated, “If any change to the Implementation Plan
causes an increase or decrease in the cost of, or time required for, performance
of any part of the work under this contract, the Contracting Officer and
the Contractor shall negotiate an equitable adjustment to the contract,
price, delivery schedule or both and shall bilaterally modify the contract
to document such changes.”

The H.60 clause awkwardly tied the government to an implementation plan
assumed to be constant. In reality, budget and other acquisition issues
resulted in annual changes. The new terms and conditions reflect the environment
experienced by all complex, major acquisition projects –the need
to be flexible.

“Taking [the H.60 clause] out … we are really focused now
on delivering the ship and not on each of the steps in the implementation
plan,” Grady said.

Moving Forward

According to Michael Tangora, deputy assistant commandant for acquisition
and director of acquisition services, the CCA is among several improvements
that will strengthen the NSC project by stabilizing the contracting, design
and production processes and procedures so that efficiencies could be gained
over time.

As the Coast Guard works through an alternatives analysis that will inform
the contracting decisions for future NSCs, the project office and the Acquisition
Directorate believe that the CCA will prove to have been a good exercise
in developing more precise performance specifications and more effective
contract vehicles.

At the end of the day, the NSC, like each of the more than 20 major projects
within the Acquisition Directorate’s $27 billion investment portfolio,
is about modernizing and recapitalizing the Coast Guard’s fleet.
It is about providing the fleet with the platforms and mission systems
that are urgently needed to meet the full set of mission requirements.